Sunday 22/01/2012 2PM GMT

The Pound hit a two-week high against the dollar on Friday, extending gains into a fifth straight day and we are now we think near an end to this rally on the Dollar but we remain bullish of Sterling on the Euro...

The Pound was up last week on a general improvement in risk appetite which saw the Euro rally from oversold levels and other risk currencies move higher on the view that, Greek will not default better economic data from the US and the view that China will avoid a hard landing. All this news is priced in and we see little more good news to propel this rally for another week.

GBP/USD

Look for Rally to fail into 1.56

Recent economic data out of the UK indicates that the UK economy has taken been hit hard by the economic slowdown in Euro zone which of course is its biggest trading partner. Production has now fallen for the last two months and a 0.7% decline in service sector activity during October suggests the main engine of UK growth is stalling.

We still need to see the missing data from the services area but its unlikely to be bullish in the last two months as all other indicators are indicating that the UK economy is slowing up. We would expect a contraction of GDP will show the UK economy is moving into recession.

Once the latest £75 bn of quantitative easing has been completed, appears likely during the first half of 2012. Additional quantitative easing could come but this should not hurt the currency to much with the previous extension proving to have little negative impact and in terms of the Euro, the ECB is now giving banks more liquidity in the form of cheap loans which is Quantitative easing in all but name.

Comment

The Pound has rallied through 1.55 and is now coming up to test 1.56 as stops are run but momentum is becoming overbought and we would look to sell between current levels and 1.57 on falling momentum with a stop behind this level. Our downside target will be support at 1.53.

GBP EUR - Sell Rallies or Break of 83.00

In the current environment of weakening global growth, the more pro-active action of the UK compared to that in Europe, combined with the fact that ECB is printing huge amounts of cash will see the Pound out perform the Euro and traders should look to go long the Pound on dips.

Comment

After the recent break above the mid Bollinger Band, the Euro failed in to 84.00 and now looks set for new lows – look for a move through 83.00 to get short or sell a bounce back to 84.00.

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